Bill Gross has more experience with the bond market than almost anyone. He co-founded PIMCO over 50 years ago and managed the PIMCO Total Return fund – once the largest bond fund in the world – for much of his time at the firm. He has seen it all.
Although he does not manage money professionally anymore, Gross is still very much a financial market enthusiast. He is active on X (formerly Twitter) and he is a common sight in financial media.
Last week, Gross sat down for an interview with Bloomberg and said a few interesting things about the bond market.
Gross explained that if, over the medium to long term, the Federal Reserve's benchmark fed-funds rate settles around 3% to 3.5%, then a 5% yield on the 10-year US Treasury is “decent value”.
Gross said that such a yield would be normal under the assumption that the term premium – or the extra return that investors demand for taking the risk of buying longer-term bonds – is around 1% to 1.25%.
There are a lot of assumptions embedded in Gross’ view but it is a reasonable take.
Gross is off on ETF blame
Something else Gross said, however, was way off the mark. Gross blamed the recent sell-off in long-term bonds on big government deficits, quantitative tightening by the Fed and a growing belief in “higher-for-longer” interest rates. But he also blamed it on ETF investors.
“What I have seen in the last week is that the bond vigilantes – to the extent that they are now individuals owning hundreds of billions of bond ETFs – they have been spooked over the last week or so by declines of 2-5% in their ETFs. And so, I think they are joining the crowd in terms of selling.”
While a plausible-sounding explanation for the bond sell-off, the data just does not support Gross’ assertion.
Investors have not been big sellers of bond ETFs in recent days. They have actually been net buyers. Over the past week, $4bn has flowed into US-listed fixed-income ETFs.
Sure, a lot of those inflows were for short-term bond ETFs, like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares Short Treasury Bond ETF (SHV). But even ETFs like the iShares US Treasury Bond ETF (GOVT) and the Schwab Long-Term U.S. Treasury ETF (SCHQ) picked up cash.
The one fund that everyone is hyper-focused on, the iShares 20+ Year Treasury Bond ETF (TLT), the big dog among long-term bond ETFs, did see outflows – but only to the tune of $160m, a fraction of the more than $17bn that has entered the fund this year.
In other words, there is no deluge of selling in bond ETFs. So unlike Gross, I would not attribute the recent spike in yields to ETF bond vigilantes.
This article was originally published on ETF.com
